We continue keeping you informed on the results of our activities, and the IFC specialists’ take on the situation and processes in global and regional economies.

In August 2017, the assets value of the WellMax investment portfolio increased by 1.04% in USD and EUR, which is equivalent to 13.22% per annum, with monthly compounded interest. The annual yield amounted to 14.3% in rubles and 11.88% in yuans, with monthly compounded interest.

The assets value of the WellMax Premium investment portfolio decreased by 3.85% in USD over the period from August 10, 2017 to September 10, 2017.

In August, quotations of the gas assets within our portfolio (UGAZ, SWN, GPOR) rose, as we had forecasted. Hurricane Irma had a short-term negative effect on the price of these instruments; according to investors, it may have resulted in a significant shrink of gas consumption in the U.S. south. On February 7 – 8, the concerns of investors caused selling-out of gas securities, however, as of September 13, the gas assets within our portfolio not only recovered after the drop but also reached previous local maxima.  

As it can be seen from the graph above, in the last month, yield dynamics of the WellMax Premium investment portfolio was highly volatile due to the Atlantic hurricane season having a negative effect on the assets price within our portfolio, firstly, on natural gas quotations and stocks of American producers of shale gas. 

From the date of publication of the previous economic review to the early September, despite the high volatility, U.S. gas prices remained at relatively high levels in accordance with our forecasts, which is shown in the graph below illustrating the price of natural gas futures for November (source: CME Group).

One of the main accelerants contributed to the growth in natural gas prices in the late August was a weak increase in U.S. natural gas stocks. In our previous reviews, we referred to it as a factor that would support fundamentally gas quotations in the mid- and long-terms.

Besides, the August rise in prices of natural gas affected positively quotations of UGAZ ETF, which makes up a noticeable part of the WellMax Premium portfolio. From August 10 to September 1, the cost of assets invested in this fund grew by 4.1% (source: Yahoo Finance).     

Weak figures of stock growth, as well as the Rover Pipeline, a new pipeline discharging excessive volumes of gas from the Marcellus/Utica shale formation, put into operation of the first order, also affected positively the stock value of shale gas producing Southwestern Energy Company, that is shown in the graph below (source: Yahoo Finance).

On September 4, however, U.S. natural gas prices started falling, along with UGAZ ETF quotations and Southwestern Energy Company’s stocks. As we have mentioned previously in the review, the reason of the downward trend was the Atlantic high storm activity. Hurricane Irma, which formed on August 30, 2017 close to the Cabo Verde islands, caused the greatest concern. Due to favorable conditions, the hurricane reached Category 2 just in one hour, and on September 5, Irma became a Category 5, which is the highest on the Saffir-Simpson scale. 

The hurricane approaching North America and growing threat of a landfall in Florida (large producer of natural gas in the area of power generation) boosted selling-out of gas securities by speculative investors. At the same time, the sharpest fall of quotations was reported on Friday, September 8 (the last trading day before Irma reached Florida on September 10), caused by uncertainty about possible consequences of the hurricane. 

At the same time, we understood that the selling-out was of temporary nature and did not exclude the effect of long-term fundamental factors, such as the above-mentioned slow growth in natural gas stocks prior to the 2017-2018 heating season and the undervaluation of shale gas producing companies within our portfolio. Thus, we didn’t only not withdraw from the gas assets but even used the price decline to increase the funds invested.

The decision we had taken proved to be correct already the next week when, despite the ongoing hurricane in Florida, the gas securities soared dramatically during 3 trading sessions not only making up for losses of the previous week but also reaching new local maxima similar to the Southwestern Energy Company, that is shown in the graphs below (source: Yahoo Finance).

Thus, we are making no change to our forecast of a gradual increase in UGAZ ETF quotations and Southwestern Energy Company stocks by the late 2017/early 2018. Besides, as an addition to our present dated August 4, 2017, we would like to share another graph with you (source: Yahoo Finance).

The chart above illustrates the changes in the shares price of Gulfport Energy Corporation (GPOR), an American gas producing company, which, in accordance with IFC analysts and experts’ calculations, as well as SWN, is expected to have strengthened noticeably by 30% or more by early winter/ spring 2018. In August, our company started opening long positions on this instrument and increased the funds invested on September 8.     

The hurricanes Harvey and Irma have led to an increase in oil prices, which, however, have stayed within the limits of the range that we outlined in our previous economic review. Nevertheless, some delayed negative consequences caused by the storm, such as decreased oil consumption and increasing oil stocks may have an opposite effect.   

The storm activity in the Atlantic Ocean growing in the late August also affected oil market dynamics making oil prices soar significantly. At the same time, despite a relatively high volatility, the price stayed within the limits of the range that we outlined in the previous economic review. Hurricane Harvey made landfall on Texas overnight into August 26 resulting in rising oil prices, as it forced oil-producing companies operating in the Gulf of Mexico to reduce significantly its output. As a result, oil output in the U.S. fell by 749 bpd just in a week ended on September 1, which can be seen from the graph below. 

At the same time, the storm affected the oil-refining sector, preventing almost a quarter of refining capacities from work, including U.S. two largest refineries – Motiva in Port Arthur with the capacity of approximately 600 thousand bpd and Baytown next to Houston having the capacity of 365 thousand bpd. Besides, the hurricane blocked oil tanker import from the U.S; when combined, these factors led to the largest shortage of petrol in U.S. market over a 12-year period. Thus, according to the data published by the U.S. Department of Energy on September 8, the country's refinery throughput dropped by 3.253 million bpd in a week ended on September 1, which can be seen from the graph below.

However, it should be mentioned that at the present moment, most refineries restored operations after hurricane Harvey, whereas hurricane Irma mentioned above may affect oil prices in an opposite way.

Considering the hurricane’s path presented above (source: BBC/National Hurricane Center), the hurricane did not affected oil fields in the Gulf of Mexico and in Texas.  

At the same time, Irma is much likely to affect noticeably the demand for oil and oil products in this region. Thus, according to the Goldman Sachs forecast published on September 11, the hurricanes Harvey and Irma may result in total decrease of oil consumption by 900 thousand bpd approximately in September and 300 thousand bpd in October. If there is a swift recovery of oil production in the Southern U.S., such a dramatic drop may have an extremely negative effect upon oil prices. As the summer car season is nearing an end and part of refineries are starting maintenance, these factors may increase the pressure resulting in a shrinking demand for crude oil in the U.S.  

Besides, a steep increase in U.S. commercial oil stocks may become another delayed negative effect resulting from the storm. According to Bank of America Merrill Lynch analysts, as soon as oil tankers drifting in the gulf begin to offload crude oil that they failed to offload before the hurricane, an increase in stocks may reach the level of up to 40 million barrels. This will also impose pressure on oil prices.     

The meeting of the OPEC+ monitoring committee in Vienna scheduled for September 21 may provide support for oil prices in the next month. The prolongation of the output cut agreement following March 2018 is most likely to be discussed there. However, from a fundamental point of view, a possible prolongation of the agreement following the first quarter of 2018 could only support quotations at a relatively high level but not trigger a price rally. If the agreement is prolonged with no change in conditions (i.e. with no additional cut), it is most likely to have little influence on the market due to the significantly increased output in Libya, Nigeria and other countries excluded from the agreement.      

Considering a combination of factors affecting the oil market, the oil price is most likely to be under strong pressure next month. At the same time, considering the present uncertainty about the scale of storm consequences, volatility in the oil market may not only last but also strengthen resulting in a broader price range at 48 – 58 USD/barrel of Brent as we suppose it to be.

The euro has exhausted its potential to strengthen against the US dollar. However, a forecast for this currency pair can be made only following the meeting of the FRS and the Bundestag elections.

Last month, a weak dollar also provided little support for oil prices. The currency continued to slide against the main currencies, including the euro, amid falling expectations of quick tax-reducing laws and infrastructure expenses, growing geopolitical tension related to the events in North Korea, as well as to natural disasters hitting the Southern U.S.  

Just before hurricane Irma's landfall on Florida, the Common European Currency even surpassed the upper limit of 1.15-1.20 that we mentioned in the previous economic review. However, it fell below 1.20 during the next trading session. In our opinion, the Common European Currency has almost exhausted its potential to strengthen against the US Dollar, however, we will abstain from any forecasts for this pair. The reason of this precaution is uncertainty related to the outcome of a meeting of the Federal Open Market Committee of the US Federal Reserve System scheduled for September 19-20, and results of the German Bundestag elections on September 24.

The ruble is growing due to the oil and weak dollar, but in the mid-term, we consider it to be overbought owing to the risk of foreign investors' interest decrease in ruble assets.

A decrease in the U.S. dollar index in the global currency market along with growing oil prices affected positively the ruble exchange rate. Last week it reached the level of 56.9 rubles/dollar. Besides, last month, the period of taxation provided support for the Russian national currency, as we mentioned in the previous review.

At the same time, as we specified in previous economic reviews, in 2017, strengthening of the ruble has been caused by foreign investors' increased interest in ruble assets under the carry trade investment strategy. The interest in this strategy is going to slide gradually, as the difference between the Russian Central Bank’s and the US Federal Reserve System’s key rates is narrowing. 

Thus, it is important to mention that Russia’s Central Bank Board of Directors scheduled a meeting for September 15 where the possibility of decrease in the key rate will be discussed among other subjects. Considering good inflation figures in Russia reported unprecedentedly low 3.3% in the late August, along with inflation expectations of the country's population falling from 10.7% in July to 9.5% in August, the Bank of Russia is likely to decide on easing the monetary policy.

At the same time, the Head of the Central Bank Elvira Nabiullina said in Bloomberg's interview that “at the following meeting of the Central Bank of the Russian Federation, there will be discussion about reduction of the rate either by 25 or 50 basis points”. This statement not only confirms our supposition, but also indicates the possibility and readiness of the regulator to speed up the pace of reducing the key rate. Whereas, this step may result in increasing foreign capital outflow in the mid-term due to the mentioned narrowing difference between the rates.

Besides, foreign investors may withdraw massively from ruble assets following the decision of the Central Bank of Norway to change the order in which the Norwegian sovereign wealth fund (GPFG) invests its money in debt instruments, as well as to reject completely investing in bonds of developing economies and corporate bonds leaving within the portfolio only sovereign bonds in three currencies: US Dollar, Euro and British Pound Sterling. At the same time, it should be mentioned that the volume of Russia's state bonds among the fund's assets amounts to 2.9 billion USD approximately, thus, making GPFG one of the biggest holders of Russian securities (it makes up about 10% of total investments in the federal loan bonds by non-residents).    

The decision of the fund to withdraw from Russian securities may lead not only to significant slackness of Russia's government debt market, but also to a ruble crash due to the conversion of the rubles earned into the foreign currency following the selling of federal loan bonds. Whereas, this is to enhance outflow of foreign capitals from the market of state loan bonds. Thus, considering a combination of factors affecting the exchange rate, we go on forecasting a gradual weakening of Russia's national currency by the late 2017/early 2018 by 10% or more of 56.5 rubles/USD.       

The ongoing storm activity in the Atlantic, remaining tension on the Korean peninsula, changing monetary policies of the main global Central Banks, all this make us expect a turbulent and informationally rich period. A period of increased volatility, which demands market participants to take rapid investment decisions based on a deep and accurate analysis, i.e. those competences, which have always been strong sides of the International Financial Community team.

Yours respectfully,

The IFC team